The tiered price model can boost cash flow for your small business. This is called the “good-better-best” approach to pricing. When you give only one price option, you’re excluding two major potential target markets. When customers on a budget see a hefty price, they have no option but to walk away.
Customers wanting something more will see a lower price as “not good enough,” and they will walk away, too. When you include three price options, ranging from a budget/value deal to a high-class product, you’re giving every prospective shopper an option … and in the end, you’ll close more sales.
The Movie Theatre Popcorn Pricing Model
Movie theatre popcorn can get ridiculously priced. A small-sized popcorn cost more than a cup of coffee. A medium cost about as much as a meal from a fast-food restaurant, and the large cost more than the movie ticket itself. Why is that?
Beyond the theater’s need to increase profit margins, they’re using the “decoy effect” in their three pricing tiers. These fixed costs are designed to persuade movie-goers into buying the large, higher-priced option.
The item they wanted people to buy was the large popcorn because they get the highest profit margin. They price a much smaller, less-bang-for-your-buck product with a price point far from the targeted product. Then, the seller prices a product in the middle that is slightly cheaper than the expensive one.
As movie-goers stand at the glass counter, they weigh their options and eventually spend more money than they had intended.
You can use this model in the pricing of your products. Find your target product that has the highest profit margin for your business and use the decoy method in your tier prices. This pricing strategy is used outside of the movie industry. In fact, it’s used (and works) for business owners all over the globe.
This type of pricing method also works best if your product is a necessity. Some could argue that popcorn and a drink are necessities at the movie theatre.
Another way to price your product is through the volume method. Volume pricing is offering more volume of your product for a lower unit price. For example, if you buy 15 cans of beans, you pay less for each individual cans. This is valuable to the customer, but you run the risk of selling more inventory for a lower price. At some price points, you could be losing money.
The tier pricing method with a decoy option means you don’t lose any money per product. No matter how you price your products, you will need marketing to get the word out. Our agency offers affordable marketing from a team of experts. And you may be surprised how little it cost.